Improving Board Performance: Scrap the Old Model
Corporate boards are under intense scrutiny – shareholder organizations are challenging boards in an attempt to improve board performance. Government prosecutors are focusing more on board responsibility for corporate misconduct.
Most of what is written about corporate board performance is so general and intended not to “offend” corporate boards.
Unfortunately, in the face of significant challenges in the marketplace, corporate boards are clinging to their old ways of operating. Most of this problem is the result of “old ways” of approaching new problems.
Corporate counsel, usually outside counsel for major company boards, are advising their clients (i.e. boards) following conservative solutions designed to “protect” the company and the board from litigation. That model has to be scraped. There is too much at stake to cling to conservative, old ways of doing business.
The so-called “corporate governance leaders” from major law firms have developed a model that is inflexible and calculated in relation to a set of cases and statutes that give board members fairly expansive discretion and protections to exercise their business judgment.
At the core of every under-performing corporate board is one significant flaw – board members, as successful business leaders, spend far too much time on operational issues. They like to focus on the specifics and tinker with business operations. In doing so, they wrap themselves in the business judgment rule to satisfy their overall fiduciary duties.
Corporate boards need to focus on leadership and strategy – they set the tone for the company and the overall objectives of the company. The CEO is accountable to the board. The relationship between the board and the CEO is critical, and requires constant monitoring and direction.
Corporate boards need to start with redrawing the mix of directors and the talent pool from which new directors are selected. A new, broader mindset is needed to bring onto a board a diverse mix of talented professionals who cover the full gamut of corporate life – financial operations, strategic marketing, ethics and compliance, management structure, public and investor relations, industry knowledge and awareness. Business governance leaders and experts have a role to play on every board but membership has to be divided among important functions and capabilities.
A second important consideration is diversity. I have advocated for years that companies need to increase the number of women and minorities on their boards. Corporate boards with increased diversity perform better – the research has confirmed this observation. It is discouraging to look at corporate websites and see the same racial and gender makeup over and over again. Diversity is a value unto itself and reflects today’s expectations for inclusion.
A third and important consideration is board structure. The board committees are standard fare these days. Every company aligns itself in the same way – governance/nominations; audit/compliance; risk committee (in financial institutions); and on and on. A new model would include a focus on important aspects to corporate governance.
From my own viewpoint, I encourage companies to bring together risk and compliance into a single committee. Audit committees have huge responsibilities and are unable to devote adequate time to ethics and compliance.